suggested answer syl12 dec13 paper 15 - institute of cost ......(b) a case of business intelligence...

Suggested Answer_Syl12_Dec13_Paper 15

Board of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)

FINAL EXAMINATION

GROUP III

(SYLLABUS 2012)

SUGGESTED ANSWERS TO QUESTIONS

DECEMBER 2013

Paper-15: BUSINESS STRATEGY AND STRATEGIC COST

MANAGEMENT

Time Allowed: 3 Hours Full Marks: 100

The figures in the margin on the right side indicate full marks.

SECTION A (50 marks)

(Business Strategy)

Questions No. 1 and 2 are compulsory.

Answer any two from the rest in this section.

(Please answer all parts of a question at one place)

1.

(a) Fastfix is a small company operating in a single city. Its business is repairing laptops. It

has earned a good name for its fair charges and speedy delivery. For the next five

years, the environment offers the following information:

Many school students are being given laptops by the school themselves and this

trend is likely to continue for another five years. College students and coaching

centres provide new laptops to all the students during the admission. The fees are

inclusive of these costs.

Tablets are first replacing laptops in certain market segments and models are

changing every six months. If there are major repairs, richer people discard the

products and go in for new products or newer versions. However, there are rural

markets and certain parts of urban markets which will still be interested in the low-

cost repaired and re-sold products.

Considering the above case of Fastfix it will limit its operations to only one city. You

are required to give:

(i) A vision statement;

(ii) A mission statement;

(iii) Does SWOT analysis exist?

(iv) Some parameters that could be used in such the above situation relating to the

financial and growth perspectives in a Balance Score Card (BSC).

(b) A case of Business Intelligence in Aviation—The entire matrix of India‟s aviation

industry has challenged ever since no-frills airlines made air travel affordable for the

country‟s growing middle class. Given that Low Cost Carriers (LCC) are the future air

travel in India, LCC are practically non-existent in now-a-days. What is the reason

behind such sorry state of affairs among airlines? The answer lies in „pricing‟. Experts



say that Indian LCC have not been able to price their tickets right and at one point

even brought their fares close to that of Full Service Carriers (FSC).

According to global standards, the average cost per passengers for LCCs should be

$35 lower than that of FSCs. But this is contingent on better utilization of aircraft

through faster turnarounds i.e., the time taken between landing and the next flight.

This is where technology initiatives such as Corporate Performance Management

using Business Intelligence (BI) tools can come very handy.

(i) What is „Business Intelligence‟?

(ii) How to create a „Business Intelligence Strategy‟ in aviation industry?

(iii) How „Business Intelligence‟ can enhance the overall decision-making process in Low

Cost Airlines Carriers. (2+2+2+2)+(2+2+3)

Answer

(a) (i) Vision Statement: Our Company intends to provide the best quality of repairs to

laptops in the fastest possible time anywhere in the city with the most reasonable

changes to customers.

(ii) Mission Statement: We deliver at customers‟ doorstep their fully functional laptops

with minimum downtimes for customers while ensuring: (a) Timely delivery as promised: (b) Reasonable charges:

(c) Good quality of services; (d) Replacement of parts by genuine parts based on genuine needs; (e) Pick up of faulty laptops; and (f) Offer stand by laptops as per customer requests.

(iii) SWOT Analysis:

(a) Strengths: Access to standard parts that normally fail in laptops, network of trained

employees who have thorough job knowledge, available loyal customers, less time

in delivery and perfect commitment. (b) Weakness: Going beyond the scope of faults recognised by the customers, often

leading to cost over runs while preventing future repairs calls. (c) Opportunities: Branches may be opened in schools/colleges/big coaching centres.

Business can be extended to sale of reworked computers in ready and going

markets, preventing maintenance services, annual maintenance contracts,

upgrades and compatibility addition with new peripherals, etc. (d) Threats: Unless tablet markets also are created to, there is a threat to long term

survival. Threats from one stop shops for repairing all types of

mobiles/computers/laptop/tablets/iphones/smart phones, etc. Threats of

obsolescence resulting in non-availability of spares.

(iv) Balance Score Cards (BSC):

(a) Financial perspective: Revenue from repairs, average job order cost, total spares

purchases, delivery costs, (revenue per jobless variable cost per job) as a % of

revenue par job, debtors management (target nil), etc. (b) Learning/innovation/growth perspectives: Number of employees trained, number

of new products repaired, number of new spares used, machinery used for

cleaning/servicing, new logistics management, service call tracking, repair status

on-line tracking, etc.

(b)



(i) The term Business Intelligence (BI) represents the tools and systems that play a key

role in the strategic planning process of the corporation. These systems allow a

company to gather, store, access and analyze corporate data to aid in decision

making. Generally these systems will illustrate BI in the areas of customer profiling,

customer support, market research, market segmentation, product profitability,

statistical analysis, and inventory & distribution analysis to name a few.

(ii) BI can help here on two counts by utilising the data held within the organisation,

trusting that it is reasonably clean and accurate: I. Establishing Early Warning Systems and Detection of Trends; II. Finding Relevant Patterns and Insights.

So a Bl strategy needs lo:

(I) be aligned to support the business strategy and goals; (II) provide the information the business needs to be an effective job; (III) Make best and cost effective use of the Bl technology and best practices available

in terms of implementation speed and development.

(iii) The Bl tools can serve to provide self-service querying and reporting facilities,

dashboards and the like to analyze the performance of the airlines in depth and

enhance the overall decision making process in the organisation. Bl can help capture

information such as: (I) Average landing per day in each serviced location; (II) Average flight duration between and two destinations; (III) Average seat capacity utilization during different times of the day; (IV) Average delay in take-off or landing; and (V) Average turnaround time of aircraft.

2.

(a) What are „Core Products‟? Give three examples of companies and their core

products.

(b) In a small town called Vellore in South Indian State of Tamilnadu, there is now one

famous deemed university called the Vellore Institute of Technology (VIT). Its founder,

Mr. Viswanathan, has adopted a unique model of building formidable Core

Competencies. He has made huge investments in creating world-class infrastructure,

which has attracted the best minds as students not only from various parts of India,

but also from other countries of the world, including developed countries like Canada

and several African nations. What has really mattered is that the quality of teaching

has improved, as VIT has been able to attract high calibre teachers from all over the

country. The National and International seminars that it has been able to conduct,

very‟ regularly, has opened up many vistas of knowledge, and opened up many

doors, in the international arena, through very innovative tie-ups with foreign

universities. In fact, VIT is just one example of a deemed university that has made

India proud. Since, it supplies high quality information technology professionals to all

IT companies world-wide, VIT has already made a name for itself, among such

companies. The campus recruitments are one hundred percent. This has made it a

very formidable learning centre in India.

There are few tests useful for identifying a core competence. Does it fit to VIT?

(c) What do you understand by the term „Strategic Drift‟? How can an organisation

prevent it? (3+3)+(1x4)+(1+4)

Answer



(a) A core product is the dominant product offered by a company. It is often its first

product and is the basis for many other products that company manufactures. The

company branding is often tied to the popularity of their core product.

„Core Products‟ are those that are used in a wide array of end-user products. For

example, motor is a core product and is used in many end products like fan, vacuum

cleaner, pump, grinders, etc. The core products are used to launch a variety of end

products. For example, Honda uses its engines in automobiles, motorcycles, lawn

mowers and portable generators. Example of firms and their core products:

Cannon - laser printer subsystems.

Honda - gasoline powered engines.

NEC - semiconductors.

3M - substrates, coating, adhesives.

Thus, a core product is not the actual product but can be defined as the benefit of the

product that makes it useful to the purchaser. This benefit might be an intangible idea

or concept connected with convenience, status or the ability to achieve a certain task

quickly. This benefit gives the product value and meets the needs of the intended

customer. The core product should be distinguished from the actual product and from

the augmented product, which includes added value such as after-sales service and

warranty.

(b) There are few tests useful for identifying a core competence. A core competence

should; (i) Provide access to a wide variety of markets. (ii) Contribute significantly to the end-product benefits.

(iii) Be difficult for competitors to imitate; and (iv) It should be valuable.

(c) Strategic drift is a subtle and unnecessary shift from an intended course or direction to

another one-that is usually undesirable, at least in the long term perspective.

An organisation can prevent it by: (i) Having a culture that welcomes and openly tolerates feedback, both positive and

negative. (ii) Embracing change when necessary. (iii) Not hesitating to question when changes seems unnecessary. (iv) Formalising senior decisions making models and discouraging unwanted surprises.

(v) Getting senior executives and decisions units to align individual goals with the long

term success of the organisation, so the direction is not missed out. (vi) Having a grand strategy, which is a comprehensive set of corporate strategies that

are durable and flexible, tailored to the strengths of the senior decision makers and

organisation.

3.

(a) HP and Microsoft global strategic alliance is one of the longest standing alliances of

its kind in the industry, with more than 25 years of combined market place leadership

focused on helping customers and channel patterns around the world to improve

productivity through the use of innovative technologies. Branded the HP and Microsoft

Frontline Partnership, the companies share technology, engineering and marketing

resources to create and promote solutions based on industry-standard computing

platforms that help solve some of the most challenging IT problems. HP and Microsoft

have jointly engineered solutions that deploy smoothly, seamlessly and delivered



competitive advantage. Over the time, the alliance has expanded from its earliest

roots focused on the desktop PC to include innovations in the data center and

emerging technologies for businesses of all sizes. The alliance also has expanded to

provide opportunities for our more than 32,000 joint resellers and ecosystem partners.

(i) Define strategic alliance. Identify three basic types of strategic alliances.

(ii) What are the advantages of the HP and Microsoft global strategic alliance?

(1½ +1½ × 3) + (½ × 8)

Answer

(a) (i) A Strategic Alliance is a relationship between two or more parties to pursue a set of

agreed upon goals or to meet a critical business need while remaining

independent organizations. This form of cooperation lies between M&A and

organic growth.

Strategic alliances are cooperative strategies between firms whereby resources and

capabilities are combined to create a competitive advantage. All strategic alliances

require firms to exchange and share resources and capabilities to co-developed or

distribute goods or services.

The three basic types of strategic alliances are:

(a) Joint ventures, where a legally independent company is created by at least two

other firms, with each firm usually owning an equal percentage of the new

company: Benefits of Joint Venture:

(i) Pooling of resources,

(ii) Full utilization of underutilized resources,

(iii) Higher rates of profits,

(iv) Low risk factors,

(v) Massive leverage

(b) Equity strategic alliances, whereby partners own different percentages of equity in

the new company they have formed: Example of Equity Strategic Alliances

Ford Motor Company and Mazda Motor Corporation formed a long – standing

equity strategic alliance.

(c) Non-equity strategic alliance, which are contractual relationships between firms to

share some of their resources and capabilities. Typical forms are like Licensing

agreements, distribution agreements and supply contracts. Example of Non-Equity Strategic Alliances

Example of a successful non- equity strategic alliances is the du and Vodafone

alliances formed in 2009.

(ii) The following are specific advantages in the global strategic alliance:

(a) Get instant market access; (b) Exploit new opportunities to strengthen the position in a market where a firm

already have a foothold: (c) Increase sales: (d) Gain new skills and technology: (e) Develop new products at a profit: (f) Share fixed costs and resources;



(g) Enlarge the distribution channels; (h) Broaden the businesses and political contact base; (i) Gain greater knowledge on international customs and culture: (j) Enhance your image in the world market place.

4.

(a) Write two uses of „Strategic Group Analysis‟ in business.

(b) How does a „Value Chain‟ analysis help a firm to gain competitive advantage?

(c) Write the benefits that can be derived from „unrelated diversification‟. What are the

two ways that an unrelated diversification strategy can create value?

(2+3)+(1+2+2)

Answer

(a) „Strategic Group Analysis‟ is more useful in several ways in business:

(i) Helps identify who the most direct competitors and on what basis they compete. (ii) Strategic group mapping might also be used to identify opportunities. (iii) Can also help identify the strategic problems. (iv) Raises the question of how likely or possible it is for another organisation to move from

one strategic group to another.

(b) The value chain analysis allows a firm to understand the activities that create value

for the firm and those that do not. A value chain analysis follows the product from its

raw-material stage to the final customer. The purpose is to add as much value as

possible as cheaply as possible and to capture that value.

There are two central types of activities in a value chain, primary and support

activities. Primary activities are involved in a product‟s physical creation, its sale and

distribution to buyers, and its service after the sale.

Support activities are those activities necessary for the primary activities to take

place. If a firm can either perform the activity in a manner that is superior to how

competitors perform it or perform a value-creating activity that competitors cannot

complete, then the activity may be a source of competitive advantage.

(c) With unrelated diversification few benefits are derived from horizontal relationships -

that is the leveraging the core competencies or the sharing of activities across

business units within a corporation. Unrelated diversification can create value through

two ways of financial economies (cost savings).

(i) Unrelated diversified firms can more efficiently allocate capital among the

component businesses than can the external financial market. This is possible

because the corporate level management has more complete information about

the performance of the component businesses and it can also discipline under-

performing management teams.

(ii) Unrelated diversified firms can also create value by purchasing other businesses at

low prices, restructuring them, and reselling them at a higher price. This practice is

most successful with mature, low-technology business, rather than high technology or

service businesses which are more dependent on employees who may leave.

5.



(a) Define „Core Competency‟. What tests are to be applied to identify core

competence? Why core competencies are relevant?

(b) “Instead of setting a high price, the firm may set a low price for a new product by

adding a low mark-up to the full cost.” What should be the pricing strategy for the

above mentioned statement? Under what circumstances such strategy is adopted?

(1+3+2)+(1+3)

Answer

(a) Core competency is a unique skill of technology that creates distinct customer value.

It not only integrates the technology but it also organises workforce and delivery of

value.

Some of the ways in which a firm can effectively employ its various „distinctive‟ or

„core competencies‟ as follows:

To identify a core competence, Prahlad and Hamel prescribe three tests: (i) it should be able to provide potential access to a wide variety of market;

(ii) it should make a significant contribution to the perceived customers of the end

product; and (iii) it should be difficult for the competitors to imitate.

Relevance of the Core Competencies:

Core competencies are bundles of skills and competencies that are built over a very

long period of time. Their main strength lies in the fact that such competencies are

very much unique to the particular organisation and to the particular industry, in

which the organisation operates. However, since the competencies are always skill-

based, it is not possible for any competitor to copy the same. This gives the

organisation an unbeatable competitive advantage.

(b) The statement stated in the question describes the „Penetration Pricing Strategy‟

which is adopted to penetrate in the market as quickly as possible. The

circumstances behind the low penetration price are: (i) The new product is being introduced in a market which is already served by well

known brands. A low price is necessary to attract gradually consumers who are

already accustomed to other brands.

(ii) The low price will to maximise the sales of the product even in the short period. (iii) The low price is set in the market to prevent the entry of new products.

SECTION B (50 marks)

(Strategic Cost Management)

Question No. 6 is compulsory.

Answer any two from the rest in this section.

(Please answer all parts of a question at one place.)

6.

(a) What do you understand by „Project Life Cycle‟?



(b) The data of running costs per year and resale price of equipment A whose purchase

price is `2,00,000 are as follows:

Year- I II III IV V VI VII

Running cost (` ‟000) 30 38 46 58 75 90 110

Resale value (` ‟000) 100 50 25 12 8 8 8

(i) What is the optimum period for replacement?

(ii) When equipment A‟s age is two years old, equipment B which is a new model for the

same usage is available. The optimum period for replacement is 4 years with an

average cost of ` 72,000. Should equipment A be changed with equipment B? If so, in

which year it will be replaced? 3+(3+1+3)

Answer

(a) The project life cycle describes the tasks that must be completed to provide a

product or service. Different project life cycles exist for specific products services. For

example, the life cycle followed to build a house is very different from the life cycle

followed to develop a software package. The project life cycle consists of four

phases like Initiation, Planning, Execution (including monitoring and controlling), and

Evaluation & Closure.

(b) The calculations of average cost per year during the life of the Equipment A:

Year Running cost

(`) Cumulative

Running cost ResaIe

price Cumulative

Dep. cost Cumulative

Total Cost Average cost

per year

1 30,000 30,000 1,00,000 1,00,000 1,30,000 1,30,000

2 38,000 68,000 50,000 1,50,000 2,18,000 1,09,000

3 46,000 1,14,000 25,000 1,75,000 2,89,000 96,333

4 58,000 1,72,000 12,000 1,88,000 3,60,000 90,000

5 72,000 2,44,000 8,000 1,92,000 4,36,000 87,200

6 90,000 3,34,000 8,000 1,92.000 5,26,000 87,667

7 1,10,000 4,44,000 8,000 1,92,000 6,36,000 90,857

(i) As average cost per year of `87,200 is minimum in 5th year so Equipment A should be

replaced at the end of the 5th year.

(ii) Given, the optimum period for replacement of Equipment B is 4 years with an

average cost of `72,000. As minimum average cost of B is lower than minimum

average cost of Equipment A. So A should be replaced by B.

As, Equipment A is two years old, so total cost per year of A from 3rd year is as follows:

Year of services Total cost per year (`) 3 2,89,000 - 2,18,000 = 71,000 4 3,60,000 - 2.89,000 = 71,000 5 4,36,000 - 3,60,000 = 76,000 6 5,26,000 - 4,36,000 = 90,000 7 6,36,000 - 5,26,000 = 1,10,000

As the total cost per year of A is higher in 5th year than the minimum average cost of

Equipment B (i.e. ` 72.000) so Equipment A should be replaced at the end of the 4th

year.

7.



(a) Agarwal Fasteners Pvt. Ltd. Specializes in manufacturing critical stainless steel

fasteners as per industry standards and specific customer requirements for a wide

variety of industries. Founded in 1974, Agarwal Fastener manufacturers and imports

best quality tools, reliable fasteners using modern multi stationed equipment. Having

its manufacturing plant in Mumbai. Agarwal Fasteners has a direct sales team in

Maharastra and supplies its products to the rest of India through its dealer and reseller

network. Due to its focus on quality and timely delivery, the company has witnessed

growth and expansion in its business over the last three decades. “Since we

specialize in providing customized fasteners as per specific requirements of our

clients, we need to deal with various vendors across the world for raw materials and

also manufacturer for many high qualities tools and dies in house. We hence needed

robust, modular and secure ERP software with tightly integrated inventory, operations

and accounting modules that could help link our warehouse to the shop floor,” says

Vikram Agarwal, Managing Director, Agarwal Fasteners Pvt. Ltd.

What distinct benefits Agarwal Fasteners Pvt. Ltd. expects from Enterprise Resource

Planning (ERP)?

(b) Why „Lean Accounting‟ is needed?

(c) A transport business makes a journey regularly, and has established that the standard

fuel cost for each journey is 20 litres of fuel at ` 40 per litre. New legislation has forced

a change in the vehicle used for the journey and an unexpected rise in fuel costs. It is

decided retrospectively that the standard cost per journey should have been 18 liters

at ` 50.5 per litre.

Required:

Calculate the original and revised flexed budgets if the journey is made 120 times in

the period.

(d)

Items 31.03.2012 (` in Lakhs) 31.03.2013 (` in Lakhs)

Sales 120 129.6

Prime cost of sales 80 91.1

Variable Overheads 20 24

Fixed Expenses 15 18.5

Profits 5 4

During 2012-13, average prices increased over these of the previous year:

(i) 20% in case of sales;

(ii) 15% in case of prime cost; and

(iii) 10% in case of overheads.

Prepare a profit variance statement from the above data. 5+2+(1+1) + (½ ×14+4)

Answer

(a) Agarwal Fasteners Pvt. Ltd. expects the following distinct benefits from Enterprise

Resource Planning (ERP): (i) Determination of cost of products correctly; (ii) ERP can be used in multi-national, multi-company, and multi-site manufacturing and

distribution environments; (iii) Flexibility and efficiently distribution and deliver to the right product from the right

warehouse to the right customer at the right time; (iv) Internets enables ERP offers internet (i.e., E-Commerce); (v) It ensures automatic quality control procedure: and (vi) It improved the production planning.



(b) „Lean Accounting‟ provides accurate, timely, and understandable information that

can be used by managers, sales people, operations leaders, accountants, lean

improvement teams and other policy makers. The information gives clear insight into

the company‟s performance: both operational and financial. It measures the right

things for a company that wants to drive forward with lean transformation.

(c) Original flexed budget 120 × 20 × ` 40 = ` 96,000 Revised flexed budget 120 × 18 × ` 50.50 = ` 1,09,080

(d) Calculation of variance:

(i) Sales price variance = 129.60 – (129.60 x 100/120) = `21.60 (F)

(ii) Sales volume variance = (129.60 x 100/120) -120 = `12 (A)

(iii) Total sales variance = 129.6 – 120 = 9.60 (F)

Decrease in volume = 120 – 12

100- ? = 10%

(iv) Prime cost price variance = (91.10 x 100/115) – 91.10 = `11.88 (A)

(v) Prime cost volume variance = 80 x 0.1 = 8(F)

(vi) Prime cost usage or Efficiency variance = (80 x 90/100) – (91.10 x 100/115)= 7.22 (A)

(vii) Prime cost variance = 80 – 91.1 = 11.1 (A)

(viii) Variable overhead price variance = (24 x 100/110) – 24 = `2.18 (A)

(ix) Variable overhead volume variance = 20 x 0.1 = 2 (F)

(x) Variable overhead efficiency variance = (20 x 90/100) – (24 x 100/110) = `3.82 (A)

(xi) Variable overhead cost variance = 20 – 24 = 4 (A)

(xii) Fixed overhead price variance = (18.5 x 100/110) – 18.5 = `1.68 (A)

(xiii) Fixed overhead efficiency variance = 15 – (18.5 x 100/110)= `1.82 (A)

(xiv) Fixed overhead cost variance = 15 – 18.5 = 3.5 (A)

Profit variance statement:

Budgeted profit 5.00

Add. Sales price variance 21.60

Prime cost volume variance 8.00

Variable O/H volume variance 2.00

31.60

36.60 Less: Sales volume variance 12.00

Prime cost price variance 11.88



Prime cost usage variance 7.22

Variable O/H price variance 2.18

Variable O/H efficiency variance 3.82

Fixed O/H price variance 1.68

Fixed O/H efficiency variance 1.82

40.60

Actual Loss 4.00

8.

(a) An automobile production line turns out about 100 cars a day, but deviations occur

owing to many causes. The production is more accurately described by the

probability distribution given below:

Production per day Probability Production per day Probability 95 0.03 101 0.15

96 0.05 102 0.10

97 0.07 103 0.07

98 0.10 104 0.05

99 0.15 105 0.03

100 0.20 Total 1.00

Finished cars are transported across the day, at the end of the each day; by ferry has

space for only 101 cars.

Required:

(i) What will be the average number of cars waiting to be shipped?

(ii) What will be the average area of empty space on the boat?

The fifteen random numbers are given: 20, 63, 46, 16, 45, 41, 44, 66, 87, 26, 78, 40, 29, 92, &

21

(b) Mention different types of „Non-conventional Variance Analysis‟.

(c) Two similar products A and B, manufactured by a company for a production period

have the following data:

Particulars Product A Product B

Selling price (`/unit) 50 70

Variable cost (`/unit) 30 40

Labour hours per unit 2 6

Total fixed costs that have to be incurred irrespective of the type of product amounts

to ` 1,80,000. Besides, there are specific fixed costs of ` 60,000 to be incurred only if A

is produced and ` 72,000 to be incurred only if B is produced. Assume no inventory. At

present, 7,500 units of A and 7,500 units of B are sold.

Required:

(i) What is the current Break-Even Point (BEP)?

(ii) What is the minimum number of units to achieve BEP?



(iii) If there are only 10,000 labour hours possible in production period, what would be the

optimum product-mix?

(d) What is meant by „Learning Curve‟? Mention two areas where learning curve

technique is useful in business. (3+3)+(1x4)+(2x3)+(2+2)

Answer

(a) Simulation of data of the Automobile Production LIne:

Production/day Probability Cumulative

Probability Random No.

Range

95 0.03 0.03 0 – 2 96 0.05 0.08 3 – 7 97 0.07 0.15 8 – 14 98 0.10 0.25 15 - 24 99 0.15 0.40 25 - 39

100 0.20 0.60 40 - 59 101 0.15 0.75 60 - 74 102 0.10 0.85 75 - 84 103 0.07 0.92 85 - 91 104 0.05 0.97 92 - 96 105 0.03 1.00 97 - 99

Total 1.00

Day Random No. Production No. of cars waiting

to be shipped No. of empty space

on the boat 1 20 98 - 3 2 63 101 - - 3 46 100 - 1

4 16 98 - 3 5 45 100 - 1 6 41 100 - 1 7 44 100 - 1 8 66 101 - - 9 87 103 2 -

10 26 99 - 2 11 78 102 1 - 12 40 100 - 1 13 29 99 - 2 14 92 104 3 - 15 21 98 - 3

Total 6 18

Average No. of cars waiting to be shipped: 6 ÷ 15 = 0.40

Average No. of empty space on the boat: 18 ÷ 15 =1.2

(b) The Non-conventional Variance analysis should include the following:

(i) Quality Cost Variance (QCV) = Actual Quality Cost – Standard Quality Cost

(ii) Market-Share Variance (MSV) = Actual sales at Standard

Contribution per unit (SCPU) – Budgeted sales units at SCPU



(iii) Market-Size Variance (MS1V) = Budgeted share of Contribution at SCPU – Budgeted

Contribution

(iv) Market-Cost Variance = Actual Marketing Cost – Budgeted Marketing Cost

(c)

(i) Current BEP (both A and B produced):

Total Fixed Cost = 60,000 + 72,000 + 1,80,000 = ` 3,12,000

Contribution of A = 20, B = 30, Average = 25 (equal no. of units A and B)

BEP = 3,12,000/25 = 12,480 units (i.e., 6,240 units of A and 6,240 units of B)

(ii) If only A is produced, BEP (60,000 + 1,80,000)/20 = 12,000 units

If only B is produced BEP (72,000 + 1,80,000)/30 = 8,400 units

Minimum number of units for BEP = 8,400 units of B

(iii) Contribution per labour hour A: 20/2 = 10 and for B = 30/6 = 5

With given 10,000 labour hours calculation of optimum product mix is not possible as

with 10,000 labour hours one can produce only 10,000/10 = 1,000 units of A & 10,000/5

= 2,000 units of B which are much lower than their respective BEPs.

(A produced 1,000 units and B produced 2,000 units which are blow the BEP)

(d) Learning Curve Theory is concerned with the idea that when a new job, process or

activity commences for the first time it is likely that the workforce involved will not

achieve maximum efficiency immediately.

Learning curve techniques are now widely used in business. Some of the uses are as

follows:

(i) It is useful in exercising control.

(ii) It may be used for make-or-buy decisions especially if the outside manufacturer has

reached the maximum on the learning curve. Helps to calculate the sensitive rates in

wage bargaining.

(iii) A knowledge of learning curve techniques assists in planning the inventories of

materials., work-in-progress, and finished goods.

(iv) It is frequently used in conjunction with establishing bid price for contracts.

(v) It suggests a basis for correct staffing in continuously expanding production.

9.

(a) The importance of exceptional quality is demonstrated by the Walt Disney Company

in operating its theme parks. The focus of the parks is customer satisfaction. This is

accomplished through meticulous attention to every detail, with particular focus on

the role of employees in service „delivery. Employees are viewed as the most

important organisational resource and great care is taken in employee hiring and

training. All employees are called “cast members”, regardless of whether they are



janitors or performers. Employees are extensively trained in customer service,

communication, and quality awareness. Continual monitoring of quality is considered

important, and employees meet regularly in teams to evaluate their effectiveness. All

employees are shown how the quality of their individual jobs contributes to the

success of the park.

Which element of Total Quality Management (TQM) is used in the Walt Disney

Company?

(b) A company produces four products, viz. P, Q, R, and S. The data relating to the

production activity are as under:

Product Quantity of

production

Material

cost/unit

(`)

Direct labour

hours/unit

Machine

hours/uni

t

Direct labour

cost/unit

(`) P 1,000 10 1 0.50 6

Q 10,000 10 1 0.50 6

R 1,200 32 4 2.00 24

S 14,000 34 3 3.00 18

Production overheads are as under:

(i) Overheads applicable to machine oriented activity ` 1,49,700

(ii) Overheads relating to ordering materials ` 7,680

(iii) Set up cost ` 17,400

(iv) Administration overheads for spare parts ` 34,380

(v) Material handling costs ` 30,294

The following further information have been compiled:

Product No. of set up

No. of material

orders

No. of times materials

handled

No. of spare

parts

P 3 3 6 6

Q 18 12 30 15

R 5 3 9 3 S 24 12 36 12

Required:

(i) Select a suitable cost driver for each item of overhead expenses and calculate the

cost per unit of cost driver.

(ii) Using the concept of Activity Based Costing, compute the factory cost per unit of

each product.

(1×5)+(2×5)+5 Answer

(a) Team Approach TQM stresses that quality is an organisational effort. To facilitate the

solving of quality problems, it places great emphasis on teamwork. The use of teams is

based on the old motto that “two heads are better than one”.

“Using techniques such as brainstorming, discussion, and quality control tools, teams

work regularly to correct problems. The contributions of teams are considered vital to

the success of the company. For this reason, companies set aside time in the workday

for the team meetings.

Teams vary in their degree of structure and formality, and different types of teams

solve different types of problems. One of the most common types of teams is the



quality circle, a team of volunteer production employees and their supervisors whose

purpose is to solve quality problems.

The circle is usually composed of eight to ten members, and decisions are made

through group consensus. The teams usually meet weekly during work hours in a

place designated for this purpose. They follow a preset process for analysing and

solving quality problems.

Open discussion is promoted, and criticism is not allowed. Although the functioning of

quality circles is friendly and casual, it is serious business. Quality circles are not mere

“Gab sessions”. Rather, they do important work for the company and have been very

successful in many firms

(b) Computation of Cost Driver Rates:

(i) Overheads relating to machinery oriented activity-

Cost driver a machine hour rate= (1,000×0.5)+(10,000×0.5)+(1,200×2)+(14,000×3) = 49,900

Rate= `1,49,700/49,900 = ` 3 per hour

(ii) Overheads relating to ordering materials-

Cost driver a number of material orders = ` 7,680/30 = ` 256 per order

(iii) Set up costs-

Cost driver a No. of set ups = ` 17,400/50 = ` 348 per set up

(iv) Administrative overheads for spare parts- Cost driver a No. of spare parts = ` 34,380/36 = ` 955 per spare parts

(v) Materials handling cost-

Cost driver a No. of times materials handled = ` 30,294/81

= ` 374 per material handling

Computation of factory cost for each product:

Items P Q R S

Materials 10.00 10.00 32.00 34.00

Labour 6.00 6.00 24.00 18.00

Overhead

Mach. Oriented Activity 1.500 1.50 6.00 9.00

Ordering of Materials 0.768 0.31 0.64 0.22

Set up costs 1.044 0.63 1.45 0.60

Administrative Spare

Parts

5.730 1.43 2.39 0.82

Materials Handling 2.244 11.29 1.12 4.99 2.81 13.29 0.96 11.60

Factory costs (`) 27.29 20.99 69.29 63.60

suggested answer syl12 dec13 paper 15 - institute of cost ......(b) a case of business intelligence...

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